Standards IV(A), IV(B), and IV(C)

• IV Duties to Employers
• IV(A) Loyalty. In matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer.

Guidance Members must not engage in any activities which would injure the firm, deprive it of profit, or deprive it of the advantage of employees’ skills and abilities. Members should always place client interests above interests of their employer but consider the effects of their actions on firm integrity and sustainability. There is no requirement that the employee put employer interests ahead of family and other personal obligations; it is expected that employers and employees will discuss such matters and balance these obligations with work obligations.

Guidance, Employer Responsibility

Members are encouraged to give their employer a copy of the Code and Standards. Employers should not have incentive and compensation systems that encourage unethical behavior.

Guidance, Independent Practice Independent practice for compensation is allowed if a notification is provided to the employer fully describing all aspects of the services, including compensation, duration, and the nature of the activities and if the employer consents to all terms of the proposed independent practice before it begins.

Guidance, Leaving an Employer Members must continue to act in their employer’s best interests until resignation is effective. Activities which may constitute a violation include:

• Misappropriation of trade secrets. Misuse of confidential information.
• Soliciting employer’s clients prior to leaving. Self dealing.
• Misappropriation of client lists.

Employer records on any medium (e.g., home computer, PDA, cell phone) are the property of the firm.

Once an employee has left a firm, simple knowledge of names and existence of former clients is generally not confidential. There is also no prohibition on the use of experience or knowledge gained while with a former employer. If an agreement exists among employers (e.g., the U.S. “Protocol for Broker Recruiting”) that permits brokers to take certain client information when leaving a firm, a member or candidate may act within the terms of the agreement without violating the Standard.

Guidance, Social Media Members and candidates must adhere to their employers’ policies concerning social media. When planning to leave an employer, members and candidates must ensure that their social media use complies with their employers’ policies for notifying clients about employee separations. A best practice is to use separate social media accounts for personal and professional communications.

Guidance, Whistleblowing

There may be isolated cases where a duty to one’s employer may be violated in order to protect clients or the integrity of the market, and not for personal gain. Some firms are required to have whistleblowing procedures in place to allow anonymous reporting of illegal or unethical acts. Members and candidates should know their firms’ policies and encourage their firms to adopt best practices.

Guidance, Nature of Employment The applicability of this Standard is based on the nature of the employment, employee versus independent contractor. If Members and Candidates are independent contractors, they still have a duty to abide by the terms of the agreement.

Application of Standard IV(A) Loyalty

Example 1:

A member solicits clients and prospects of his current employer to open accounts at the new firm he will be joining shortly.

Comment:

It is a violation of the Standard to solicit the firm’s clients and prospects while he is still employed by the firm.

Example 2:

Two employees discuss joining with others in an employee led buyout of their employer’s emerging markets investment management business.

Comment:

There is no violation here. Their employer can decide how to respond to any buyout offer. If such a buyout takes place, clients should be informed of the nature of the changes in a timely manner.

Example 3:

A member is writing a research report on a company as a contract worker for Employer A (using Employer A’s premises and materials) with the understanding that Employer A does not claim exclusive rights to the outcome of her research. As she is finishing the report, she is offered a full time job by Employer B and sends Employer B a copy of a draft of her report for publication.

Comment:

She has violated the Standard by not giving Employer A the first rights to act on her research. She must also be careful not to take any materials used in preparing the report from Employer A’s premises.

Example 4:

A member helps develop software for a firm while acting as an unpaid intern and takes the software, without permission, with her when she takes a full time job at another firm.

Comment:

She is considered an employee of the firm and has violated the Standard by taking her employer’s property without permission.

Example 5:

A member prepares to leave his employer and open his own firm by registering with the SEC, renting an office, and buying office equipment.

Comment:

As long as these preparations have not interfered with the performance of his current job, there has been no violation. The solicitation of firm clients and prospects prior to leaving his employer would, however, be a violation of the Standard.

Example 6:

A member is a full time employee of an investment management firm and wants to accept a paid position as town mayor without asking his employer’s permission.

Comment:

Because the member serving as mayor does not conflict with his employer’s business interests, as long as the time commitment does not preclude performing his expected job functions well, there is no violation.

Example 7:

A member who has left one employer uses public sources to get the phone numbers of previous clients and solicits their business for her new employer.

Comment:

As long as there is no agreement in force between the member and his previous employer that prohibits such solicitation, there is no violation of the Standards.

• IV(B) Additional Compensation Arrangements. Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.

Guidance Compensation includes direct and indirect compensation from a client and other benefits received from third parties. Written consent from a member’s employer includes email communication. Members and candidates who are hired to work part time should discuss any arrangements that may compete with their employer’s interest at the time they are hired, and abide by any limitations their employer identifies.

Recommended Procedures for Compliance Make an immediate written report to employer detailing any proposed compensation and services, if additional to that provided by employer. Details including any performance incentives should be verified by the offering party.

Application of Standard IV(B) Additional Compensation Arrangements

Example 1:

A member is on the board of directors of a company whose shares he purchases for client accounts. As a member of the board, he receives the company’s product at no charge.

Comment:

Because receiving the company’s product constitutes compensation for his service, he is in violation of the Standard if he does not disclose this additional compensation to his employer.

If a client gives us money for doing a good job (one time), we need to disclose it (though not necessarily in writing).

If we have an agreement with a client that we will receive money in the future for outperformance, we need to disclose that in writing.

For any side job that potentially competes with our employer, written permission is required.

For a side job (e.g., bartender) that’s unrelated to our primary job, no disclosure is required.

• IV(C) Responsibilities of Supervisors. Members and Candidates must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.

Guidance

Members must make reasonable efforts to prevent employees from violating laws, rules, regulations, or the Code and Standards, as well as make reasonable efforts to detect violations.

Guidance, Compliance Procedures Understand that an adequate compliance system must meet industry standards, regulatory requirements, and the requirements of the Code and Standards. Members with supervisory responsibilities have an obligation to bring an inadequate compliance system to the attention of firm’s management and recommend corrective action. While investigating a possible breach of compliance procedures, it is appropriate to limit the suspected employee’s activities.

A member or candidate faced with no compliance procedures or with procedures he believes are inadequate must decline supervisory responsibility in writing until adequate procedures are adopted by the firm.

Recommended Procedures for Compliance A member should recommend that his employer adopt a code of ethics. Employers should not commingle compliance procedures with the firm’s code of ethics, this can dilute the goal of reinforcing one’s ethical obligations. Members should encourage employers to provide their code of ethics to clients.

Adequate compliance procedures should:

• Be clearly written. Be easy to understand.
• Designate a compliance officer with authority clearly defined. Have a system of checks and balances. Outline the scope of procedures.
• Outline what conduct is permitted.
• Contain procedures for reporting violations and sanctions. Structure incentives so that unethical behavior is not rewarded.

Once the compliance program is instituted, the supervisor should:

• Distribute it to the proper personnel. Update it as needed.
• Continually educate staff regarding procedures. Issue reminders as necessary.
• Require professional conduct evaluations. Review employee actions to monitor compliance and identify violations. Enforce procedures once a violation occurs.
• Review procedures and identify any changes needed to prevent violations in the future.

If there is a violation, respond promptly and conduct a thorough investigation while increasing supervision or placing limitations on the wrongdoer’s activities.

Application of Standard IV(C) Responsibilities of Supervisors

Example 1:

A member responsible for compliance by the firm’s trading desk notices a high level of trading activity in a stock that is not on the firm’s recommended list. Most of this trading is being done by a trainee, and the member does not investigate this trading.

Comment:

This is a violation of the member’s responsibilities as supervisor. She must take steps to monitor the activities of traders in training, as well as investigate the reason for the heavy trading of the security by her firm’s trading desk.